October
3, 1998
This Date's Issues: 2408•2409
Johnson's Russia List
#2409
3 October 1998
davidjohnson@erols.com
[Note from David Johnson:
1. Moscow Times: Chloe Arnold, Comrades Mourn Dead of 1993
Uprising.
2. Yale Richmond: How to Lose Russia.
3. Sovetskaya Rossiya: Aleksandr Korzhakov, State Duma deputy and
Defense Committee member, "Commander in Chief of a Beggarly Army."
(Korzhakov Urges Yeltsin Resignation).
4. Reuters: Gareth Jones, PM says Russia open to foreign investment.
5. Los Angeles Times: Tyler Marshall, U.S. Signals Change of Course
in Policy Toward Russia. Diplomacy: Albright says democratically backed
reforms count more than personalities in the Kremlin.
6. Baltimore Sun: Will Englund, As economy suffers, so do patients in
Russia. Doctors, pharmacists struggle for medicines.
7. Edwin Dolan: Monetary Policy Options for the Primakov Government.]
******
#1
Moscow Times
October 3, 1998
Comrades Mourn Dead of 1993 Uprising
By Chloe Arnold
Staff Writer
Flapping their arms against the chill, a small crowd of pensioners gathered
beside the White House in Moscow on Friday to commemorate the fifth
anniversary of the second October revolution this century.
They carried lengths of ribbon f scarlet to symbolize the Communist Party and
inky black to mourn the scores who died, which they tied to every one of the
railings around the building where they were holed up during the armed
confrontation Oct. 3 and 4, 1993.
The White House, now the main government building, then housed the parliament
and was the center of resistance to President Boris Yeltsin. He claimed
victory by sending tanks to fire on the building.
"I was in the White House when they started to fire," said a frail old woman
in a purple head scarf, who refused to give her name. "There were tanks
everywhere, barricades everywhere. Every few seconds a bullet whistled past."
She remembers being allowed out of the building for a few minutes to bring a
boiled cranberry drink to the dozens of wounded outside the White House. "They
were lying on the pavement on pale pink chalk pictures drawn by school
children," she said. "They looked as though they were simply resting. But most
of them were dead."
Nearby, another group of 1993 veterans has set up a makeshift shelter outside
the White House. The men have been there sharing memories since Sept . 21, the
date the confrontation began five years ago.
That was the day the leaders of the Supreme Soviet, the lower house of
parliament, holed up in the White House after refusing Yeltsin's order to
disband. Although city authorities cut water and electricity to the building,
they held out for almost two weeks.Outside, their supporters built barricades
out of concrete blocks and metal fence posts against the heavy police
presence. On Oct. 3, the stand-off collapsed. Vice President Alexander
Rutskoi, who had declared himself president, and parliament Speaker Ruslan
Khasbulatov urged Muscovites to storm the television center at Ostankino, just
as Vladimir Lenin, 76 years earlier, had led the Bolsheviks in seizing the
telegraph, telephone and train stations.
That evening saw a bloodbath at Ostankino, as die-hard opponents of Yeltsin
clashed with police officers in riot gear. The following morning, Yeltsin gave
Defense Minister Pavel Grachev written instructions to launch a full-blown
assault on the White House.
As dusk fell on Oct. 4, the Supreme Soviet gave in. A dishevelled and sullen
band emerged from the White House, only to be led away to prison cells. Two
months later, on Dec. 12, the first State Duma elections were held in Russia
since 1917. At the same time, a referendum was held to approve the new
Constitution, which consolidated Yeltsin's position as president.
Volodya Kovalenko, who now works as a guard to a military colonel, is one of
the men camping outside the White House for the duration of the anniversary.
His army battalion was on its way back from Germany to Kazakhstan in the fall
of 1993, and stopped in Moscow along the way.
"It was right in the middle of the coup," Kovalenko said. "We helped to build
the barricades to defend Rutskoi and the others."
Four out of the 32 men in Kovalenko's battalion were killed, including his
brother, Sasha. Kovalenko himself was wounded in the leg by a stray bullet.
"The official figures put the death toll at 147," he said. "But it must have
been nearer 1,500. The hospitals were all full. I know, because I was
there."He is joined in his round-the-clock vigil by five other men, although
dozens have gathered with them during the days. They are around the corner
from the camp set up in June by protesting coal miners.
Behind Kovalenko's campfire stands a memorial for the civilians killed in the
1993 confrontation. "There used to be a wall here," he said. "The graffiti on
it said 'Yeltsin, where are the bodies of our children?' They took it down,
because it was too shameful outside the government building."
Unlike the leaders of what they call the coup attempt, who were amnestied the
following year, Kovalenko served a three-year prison sentence in the Volgograd
region for his role in the unrest. "They said we were going to jail for
criminal charges, not political ones," he said.
Rutskoi, one of the leaders, was later elected governor of the Kursk region.
Although most Muscovites were too busy coping with the troubles of today to
think about the revolutions of yesterday, Viktor Anpilov, far-left firebrand
leader of the Working Russia movement, gave a press conference Friday to
coincide with the anniversary.
"Today is my birthday," said Anpilov, who played a leading role in the events
of 1993.
"Five years ago I spent the day at Smolenskaya Ploshchad, stirring up the
emotions of the people. Today I want to dedicate the day to fallen friends of
1993."
******
#2
Date: Sat, 03 Oct 1998
From: yale richmond <yalerich@erols.com>
Subject: How to Lose Russia
I found some things to agree with in Ira Strauss's "How Not to Lose Russia"
(JRL 2408) until I got to his recommendation to rapidly expand NATO to
countries around Russia's borders. I can think of no other way to encourage
anti-Western sentiment in Russia.
Strauss overestimates the strength of the pro-Western forces in Russia
today (or in any other time). And he overlooks the fact that much of what
he proposes is not in tune with Russian cultural traditions. Any Western
program of assistance for Russia (or any other country) which does not take
into consideration its cultural traditions, is doomed to failure.
Western assistance, if properly thought out and based on an understanding
of Russia's past and present, can play a role in Russia's recovery. But the
main effort will have to come from the Russians themselves, and they will
do it in their own way. Western solutions, based on West European recovery
after World War II, will not do the job.
*******
#3
Korzhakov Urges Yeltsin Resignation
Sovetskaya Rossiya
22 September 1998
[translation for personal use only]
Article by Aleksandr Korzhakov, State Duma deputy and
Defense Committee member, under the "A Deputy's Opinion" heading:
"Commander in Chief of a Beggarly Army"
How many times have we already heard from the lips of
President Yeltsin--the supreme commander in chief of Russia's Armed
Forces--that the Army's financial resource needs will be completely
satisfied. The last time we heard such resounding assurances from
the head of state was, it seems, in August of this year.
Perhaps after these assurances something is changing?
Unfortunately, there are no grounds for optimism.
I read the latest document on "Certain Problems With Financing
the Defense Ministry of Russia as of 14 September 1998." It is
impossible to read this document calmly; behind every line are the
same unfulfilled promises.
In accordance with the Russian Federation budget approved for
1998, 80.4 billion rubles [R] was supposed to be received for the
Army's needs. With a guaranteed financing quota in the amount of
R65.8 billion, only R24.8 billion has been allocated.
It may be said with complete certainty that before the end of
the year, the expenditure item financing the Defense Ministry will
not have been implemented. Where could the financial resources come
from, when the country, by reason of the feeble activity of first
one and then another government sent into retirement, has found
itself in a terrible crisis, in financial ruins.
The financing quota for the third quarter was determined in
the amount of R21.3 billion. In actuality, in July and August, R3.6
billion was allocated, that is, 16.8 percent of the guaranteed
quota.
After this, can we be astonished by reports in the press of
suicides of servicemen or their families' blocking of airfield
runways?
Or the extraordinary deed of the tank crew major Igor
Belyayev, who brought a battle tank out onto a city square in an act
of protest against the outrages that have been perpetrated on the
Army.
I will remind my readers briefly that this event--and an event
it really did become--took place at the end of July 1998 in
Novosmolino, in "prosperous" Nizhniy Novgorod Oblast. Major
Belyayev, who had not received his monetary allowance for several
months in a row, drove to the city square in a tank (a T-80RV with a
125-mm gun and a speed of 90 kilometers per hour), in order to
attract the public's attention to the problems of the Army.
Newspapers and television reported this "incident," but they
did not bother to delve into the reasons that induced the military
man to take such an extraordinary action. Maybe because after this
event Major Belyayev and his men were paid. Or maybe because the
officers of the unit where the major serves, the members of the
officers' families, and the residents of Novosmolino not only viewed
the officer's action with understanding, but gave him moral support.
A noteworthy fact.
Can it really be that servicemen have to "knock loose" their
pay with tanks, planes, missiles, and weaponry of all forms? We
would not like that to happen, but, it seems, we are not insured
against new "extraordinary" actions of military people who find
themselves on starvation rations.
President Yeltsin has also spoken more than once about the
necessity of reforming the Army. And how many articles have there
been on this topic in the press, and how many "specialists" have
already come forth with "recommendations' on how best to reform our
Armed Forces, we do not wish to recall.
No one will dispute that reform is needed in the Army in
general. I am also convinced that it is necessary to reform the
Armed Forces. But even a wizard could not do this with no money. But
just as the financing of reform measures was meager, it has remained
such, despite all President Yeltsin's assurances and
admonitions.
Thus, of the R4 billion envisioned for this year for the goals
indicated, R2.04 billion was allocated. And this is despite the fact
that the process of reform in the Army cannot be implemented "in
portions." It is not for no reason that the Defense Ministry
requested that the necessary sum be allocated in the first half of
the year, and in the full amount.
The Army's needs are being insufficiently met not only in the
payment of money allowances to servicemen. There is a chronic lag in
the financing of expenditures without which the Armed Forces cannot
exist at all. Here are some more data on the state of financing:
Payment for and storage of fuels and power fuels is financed at a
level of 48.8 percent; repair of weaponry and military hardware--
10.4 percent; payment for the leasing of communications channels--
17.5 percent; medical care--10.2 percent; scientific research and
experimental design projects (NIOKR)--8.4 percent; capital
construction--18.3 percent; and so on.
The lack of funds is leading to a situation where Army reform
measures in a number of cases are yielding a more contrary result
than one would want.
Because of their calamitous condition and their lack of
confidence in the stabilization of the situation, the
professionalism of the personnel is being lost, the best-trained
officers are leaving the Army. The Armed Forces are losing their
identity and the ability to carry out their mission. Everywhere,
social tension is growing in military collectives. And how could it
fail to grow, if indebtedness with respect to payments to personnel
have reached more than R16 billion. For three months, and for
lengthier periods in individual military units, enterprises, and
organizations of the Armed Forces, servicemen have not received
their pay, and allowances and compensation have not been paid out
for many months. Indebtedness for social benefit payments now
amounts to R6.4 billion.
The above-mentioned Major Belyayev "knocked loose" his wages
with a tank. But what are those 27,300 servicemen to do who were
discharged from the Army and who were not given the appropriate
discharge pay (and that is R499.9 million). Before the end of 1998,
some 30,400 more servicemen will be discharged from the Army. What
will they use to "knock loose" from President Yeltsin and the
government that which they are entitled to?
One is getting the impression that within the President's
structures they have become firmly convinced that military people
are "incapable" of decisive action over such "trifles" as the
nonpayment of their monetary allowance. I think that are in grave
error. Someone once said "a hungry soldier is a mean soldier."
Crudely said, but essentially true. I would like to add on my own
behalf: Our soldiers and officers are our defense, so why leave our
protectors hungry? There is no justification for that!
What is to be said in conclusion? Maybe, simple dreaming. I
imagine the jubilation of people in shoulder straps, and not only of
them, if a report suddenly appeared in the press with the following
content: "In connection with my irreparable inability to fulfill the
obligations of the office of supreme commander in chief, I resign.
Boris Yeltsin." At least some kind of perceptible impulse to set
into motion normal reforms in the Army and normal functioning of all
of its structures.
*******
#4
PM says Russia open to foreign investment
By Gareth Jones
MOSCOW, Oct 3 (Reuters) - Prime Minister Yevgeny Primakov said on Saturday
Russia's crisis-ridden economy would remain open to foreign investment and
ruled out any return to Soviet-style currency controls.
As Primakov gave his assurances to major foreign investors in the White House,
the government's headquarters in central Moscow, several hundred protesters
gathered outside to demand President Boris Yeltsin's resignation over the
crisis.
The demonstrators, waving red flags and Communist banners, were also marking
the fifth anniversary of Yeltsin's suppression of a revolt by the Soviet-era
Russian parliament.
However, a group of coal miners who have been picketing the White House since
June 11 over unpaid wages announced they would end their protests on Monday to
allow the new government to focus on the country's problems including rampant
corruption.
The miners, mostly from the Far North and Siberia, have been living rough in
tents and other makeshift accommodation.
Primakov's new cabinet, a loose coalition dominated by moderate leftists and
non-party professionals, has still to hammer out an anti-crisis economic
programme acceptable to both Russia's Communist-dominated parliament and
global creditors.
Russian media have buzzed with speculation in recent days that the programme
might include a ban on the circulation of dollars, in which many Russians hold
their savings.
``These ravings disseminated by the mass media about the government preparing
to ban dollar circulation and reverse privatisation do not correspond to
reality,'' Primakov told the investors in televised remarks at the start of
their meeting.
He said Moscow would take steps to prevent capital flight, which he believes
has badly sapped Russia's ability to pull out of its decade-long recession.
``We need an inflow of capital into the real sector of the economy,'' Primakov
told the investors, who included representatives of major companies such as
French car maker Renault SA (RENA.PA) and U.S. giants Procter & Gamble (PG.N)
and Coca-Cola (CCE.N).
``We shall continue the privatisation of state property. But it will be
carried out not just to top up the budget. It will be carried out with a view
to growth in output, investment, efficiency...so that it serves the people's
interests.''
Primakov, confirmed in his post by parliament three weeks ago, has been
critical of foreigners drawn only to short-term speculation in the high-
yielding, short-term debt market.
Yeltsin sacked the government of Primakov's predecessor, Sergei Kiriyenko,
after it announced a restructuring of the GKO domestic debt market, an
effective devaluation of the rouble and a temporary default on some foreign
debt repayments.
The 67-year-old Kremlin chief has been gravely weakened by the latest economic
crisis and is not expected to seek a fresh term of office at the next
election, due in 2000.
Prominent politicians are already starting to position themselves for that
race, among them the powerful Moscow Mayor Yuri Luzhkov, who on Saturday said
he was ready to lead a new centre-left movement to tackle Russia's crisis.
Luzhkov has made clear he will run for the presidency if no other ``suitable''
candidate appears. Other declared contenders include liberal Grigory
Yavlinsky, ultra-nationalist Vladimir Zhirinovsky and former prime minister
Viktor Chernomyrdin.
Itar-Tass news agency said foreign investors told Primakov that Russia must
simplify taxes, facilitate the movement of goods and reform its debt-laden
banking system.
Central bank governor Viktor Gerashchenko and Finance Minister Mikhail
Zadornov were due to hold talks with the International Monetary Fund later on
Saturday in Washington.
Russia is counting on loans worth $2.5 billion from international sources to
help stabilise its finances. Zadornov said on Friday the loan figure was
already factored into the government's draft budget for the fourth quarter of
1998.
On Saturday Primakov announced some relief to Russia's hard-pressed farmers,
deferring debts owed by producers and agro-industrial enterprises to the
federal budget in 1998 by five years. Farmers have been hit this year by a
poor harvest.
Primakov also held telephone talks with officials in Russia's troubled North
Caucasus region. Earlier on Saturday the body of a Russian representative in
breakaway Chechnya, Akmal Saidov, was discovered, four days after he was
abducted.
******
#5
Los Angeles Times
October 3, 1998
[for personal use only]
U.S. Signals Change of Course in Policy Toward Russia
Diplomacy: Albright says democratically backed reforms count more than
personalities in the Kremlin.
By TYLER MARSHALL, Times Staff Writer
WASHINGTON--In a speech that carried the first hints of a major rethinking of
American policy toward Russia, Secretary of State Madeleine Albright
acknowledged Friday that Moscow's problems can be resolved only if the
solutions have popular legitimacy.
"I do not want to suggest that there is any uniquely Russian way to
prosperity," she said in a formal address to members of the U.S.-Russia
Business Council in Chicago. "The policies we would like the Russian
government to pursue have to be worked out democratically, with the support
and understanding of the Russian people, or they are going to fail.
"This means we need to be patient with the workings of the democratic
process in Russia," she added. "It also means we should not start each day by
taking a census of reformers in the Kremlin or hold our breath every time
there is a leadership change. We should be interested in politics, not
personalities."
Her comments were interpreted by Russia specialists here as an
acknowledgment that tough, Western-designed economic recipes long backed by
the Clinton administration as the key to Russia's transition cannot succeed on
their own. Albright's speech also signaled that the United States is
attempting to create distance between its support for reform in Russia and
that for President Boris N. Yeltsin.
Administration critics long have chastised the United States and other
Western countries for linking Yeltsin's fate to that of the entire transition
process away from communism in Russia.
U.S. officials dealing with Russia also have been criticized for pushing
reforms that ignore the vast cultural differences that separate Russia from
the West.
"It's encouraging to see Secretary Albright beginning to recognize that
if you are going to have an effective policy toward a major country . . . [it]
must be based on the domestic political process," said Dimitri Simes, a
respected Russian emigre and director of the Nixon Center for Peace and
Freedom, an independent Washington-based think tank. "You have to start from
the assumption that a serious country that stems from a different civilization
and has different perceptions does not need an American model."
Albright said the administration is reexamining all of its foreign
assistance programs to Russia in the wake of the crisis there and is
"retargeting money where it can be used effectively to support economic and
democratic reform."
"We will increase our support for small business and the independent
media and try to bring a much larger number of Russian students, politicians
and professionals to live and learn in America," she said.
In addition to about $400 million in direct aid to Russia for dismantling
nuclear weapons and keeping nuclear materials safe and secure, the United
States last year provided $130 million for nonmilitary programs, including
privatization and economic restructuring.
While the administration has requested an increase to $225 million in aid
to Russia for civilian-only projects for 1999, a State Department official
said Friday that he expects a de-emphasis of programs offering help in such
areas as tax reform and energy deregulation--programs inherently heavy on
Western advice.
Instead, he said, new support will be thrown into less politically
charged programs such as exchanges that have brought about 35,000 Russians to
the United States to watch U.S.-style democracy over the past five years.
"It will be at a lower level, people to people, and away from Moscow
toward the regions," the official said of future U.S. aid.
******
#6
Baltimore Sun
3 October 1998
[for personal use only]
As economy suffers, so do patients in Russia
Doctors, pharmacists struggle for medicines
By Will Englund
Sun Foreign Staff
KLIN, Russia -- Last week at the Klin City Hospital there was no plaster
available for casts, so surgeons used splints on patients with broken bones
instead. Now the plaster is back, but drugs to treat circulatory ailments have
run out.
"We have to warn the chief every time we are going to have an operation so
that he can make sure we have all the anesthetics and medicines we need," said
Dr. Stanislav Samokhin, chief of surgery. There's rarely enough of any one
anesthetic, he said, so doctors mix and match what they have.
The economic chaos and frozen bank accounts that have shut down so much trade
in Russia have brought about a near-total halt in the flow of medicine as
well. Spot shortages are hitting hospitals and clinics across the country. The
remaining supplies are making it to market only sporadically, and there's
little prospect of replacing them once they're used up.
This is a country that imports 82 percent of its medicines, and barely
anything is coming across the border.
Throughout Russia, pharmacy shelves are going bare, hospitalsare scrounging
for whatever they can get and appealing to patients to bring their own.
Insulin for diabetics is about to run out; those drugs that are available are
becoming so expensive that few can afford them. Newspapers are printing
recipes for home remedies.
The overall picture is catastrophic. Yet here, as in towns across Russia,
people are dealing with the shortages. Nothing is satisfactory, but disaster
hasn't hit. Like a rider on a wobbly bicycle, the system -- as of this moment
-- has managed to keep going.
Hospital's `scared' doctor
The Klin City Hospital is a collection of stained yellow stucco buildings on a
weedy rise above the Sister River about 40 miles northwest of Moscow. It has
had to contend with shortages ever since what Samokhin calls the "avalanche"
hit Aug. 17.
"We are surviving, but it takes all our effort," he said. "As to the future --
well, I'm scared."
The hospital has appealed to local clinics for surplus drugs, asked patients
to bring their own syringes, dispensed with X-rays when film was short.
Samokhin, a mild man in a starched blue cap, has worked at the hospital since
1976. It is the only hospital in the region, serving not just Klin, a city of
100,000, but nearby villages as well, places with names like Spoons, Black
Dirt, Teacups and Pawns.
He has never seen a time like the present.
Suppliers fear nonpayment
Until 1990, Russia produced most of its own medicine. A lot of it was nearly
worthless. Now the quality is far better, but domestic manufacturers produce
just 18 percent, and even they must depend on imports for raw materials.
The government says there are stockpiles of drugs that should last at least
until winter. Suppliers here acknowledge they have some of the needed
medicines in stock, but they are reluctant to sell them because they can't be
sure of getting paid, and they don't know what it will cost to replenish them.
And, with the payments system still frozen, it's not clear how they could buy
supplies from abroad even if they had the money.
Klin City Hospital has not yet cut back on its weekly average of 40 or 50
operations, Samokhin said, but everyone assumes it may have to. So far it has
not had to ask patients to try to buy their own medicine elsewhere. But some
patients' families raise the possibility themselves, Samokhin said, and their
offers are not turned down.
In years past the hospital was inundated with directives from the Ministry of
Health, so many that it had to ignore a good deal of them. Since the current
crisis began in August, no directives have arrived. Prime Minister Yevgeny
Primakov is still trying to form a Cabinet; for now, Moscow is letting the
country fend for itself.
"Of course it's strange," said Samokhin. "Wouldn't you think someone would be
trying to find a way out of this?"
Yet the routine of Russian hospital life has changed little for the patients.
The nurses here act like construction-crew bosses. The seven-bed wards are
heated so well that patients hang out in the stairwells just to cool off and
get a change of view. Relatives of the sick and injured don white coats and
minister to their relatives during visiting hours.
Viktor Buzinkin, 53, cheerfully held up a large bag of groceries his family
had brought him -- Russian patients have always relied on their families for
food.
Buzinkin has blood clots in his left leg. He has no idea what he's being
treated with. "They give me some shots, but they never tell me what they are,"
he said. "The doctor said I had to stay here another week, and then probably
have an operation so it doesn't happen again. I don't know. The doctors are
pressuring me."
At 6 p.m. all visitors leave. They wait at the bus stop across the street from
the house where the composer Peter Ilich Tchaikovsky lived. Trucks from the
new brewery and the new sausage plant rumble by, passing the McDonald's before
turning left into town.
Klin seemed to have turned a corner in the past year or so. Prosperity
beckoned. Then came the crash that's hit all of Russia.
"It was all going so well," said Lyudmila Yarotskaya, manager of a city-owned
pharmacy, as she straightened a stack of prescriptions she is unable to fill.
"The customers are nervous and worried," she said. The pharmacy's prices are
strictly controlled by the city; unfortunately, that means that the few
suppliers who are willing to do business have turned to independent commercial
outlets instead.
Officials called `thieves'
Many of Yarotskaya's customers are elderly or veterans or diabetics -- among
the 22 million Russians who are entitled to free medicines and now aren't
getting them. "That's a system that doesn't correspond to financial reality,"
she said.
A young man came in with prescription orders for his elderly father. She
filled one, took his telephone number, and put the other six on her stack.
Across town, at a commercial pharmacy, the shelves were well-stocked. A clerk
said there had been shortages at first, but her boss had found a way to do
business and things seemed to be getting back to normal.
"Normal?" exploded Yulia Pankova, 62, looking for affordable medicine to treat
a circulatory problem. "Three times higher? Five times higher? You call that
normal? It was 34 rubles and now it's 104. They don't have any at the city
pharmacy. Can I buy it? You tell me how. My pension is 300 rubles a month.
This whole crisis is playing into the hands of business crooks. They used to
be Communist Party secretaries, and now they're nothing but thieves."
In a rage, she put the $7 bottle of medicine back on the shelf. Tears sprang
to her eyes and her face turned red.
The clerk had had enough, and told her to get out.
*******
#7
Date: Thu, 01 Oct 1998
From: aibec@knight-hub.com (Edwin Dolan)
Subject: monetary policy
Monetary Policy Options for the Primakov Government
By Edwin Dolan
Edwin Dolan is president of the American Institute of Business and Economics
in Moscow.
Already since August, Russian prices have risen 64 percent. What next? Is
hyperinflation inevitable, or is there a middle ground between
hyperinflation and the hyperausterity of the Kiriyenko government? Although
the actual outcome depends on political decisions yet to be taken, some
basic economic principles can help in understanding what has happened to
date and narrow the range of discussion about what is likely to lie ahead.
Understanding the Devaluation Shock
The 64 percent inflation that has taken place so far has largely been a
response to devaluation, an example of what economists call a "supply
shock." Devaluation pushes up prices of tradable goods (exports, imports,
and import substitutes) while prices of nontradable goods (such as services,
housing, and locally consumed produce) are not directly affected. Prices
overall rise by an average of the two. For example, if tradable goods
account for half of GDP, and devaluation from 6 to18 rubles per dollar
causes their prices to triple, while the prices of nontradables remain
unchanged, the average price level will double. The 64 percent inflation
since August suggests that most, but not necessarily all, of the initial
supply shock of devaluation has worked its way through the system.
How the devaluation shock plays out over the next few months will depend on
monetary policy. The alternatives can be evaluated in terms of the equation
of exchange, MV=PY, where M is the money stock, V is the velocity of
circulation of money, P is the price level, and Y is real GDP. In the
immediate impact of devaluation, P is able to rise without an increase in M
because velocity spikes upward as people try to shield themselves from
inflation by converting their money to goods or foreign currency. This
effect has been very visible in Russia: lines at exchange points, lines at
electronics stores, lines for sugar and kasha. But the high-V, high-P
position is not a stable equilibrium.
In theory, holding the money supply fixed could depress demand strongly
enough to make prices of nontradable goods fall in absolute terms, and
average prices would return to their starting point. This is basically what
has been happening in Japan, where the sharp depreciation of the yen has not
led to general inflation. But that is hardly realistic for a country like
Russia. Prices and wages are resistant to downward movement, so that very
tight monetary policy typically depresses real GDP. There has been a slight
fall in GDP even in Japan. In Russia the impact on GDP has already been more
pronounced, and trying to hold the money stock absolutely fixed would no
doubt lead to complete collapse of the fragile remnants of the banking
system and bring much of the real economy to a standstill.
A more moderate policy would be to print enough new money to accommodate the
immediate inflationary impact of devaluation. In Russia's case, the money
supply could roughly double over the next six months or so, after which the
printing presses would stop and prices would stabilize again. In terms of
the equation of exchange, one needs to follow a careful time path in which
money is injected into the economy at a rate sufficient just to offset the
natural decline of velocity from its transitory, post-shock peak. The new
rubles can be used for such constructive purposes as helping to restore bank
liquidity and paying off pension arrears. This process seems too good to be
true, but we can actually find countries where it has happened. For example,
at the end of Germany's famous 1923 hyperinflation, there was a period of
some months during which the money stock grew rapidly, offset by a drop in
velocity, and prices remained stable. Of course, we can also find countries
that overdid it, and turned transitory, devaluation-related inflation into
ongoing, money-driven inflation.
So far, is appears that those advisers who advocate controlled emission of
money have a better case than those who oppose printing any new rubles at
all. Looking further ahead, though, it gets harder to reconcile expansionary
monetary policy with economic stability. In order to analyze the medium-term
future, we need to take into account the fact that Russia has not only
devalued, but defaulted on its debt, thereby cutting itself off from credit
markets.
Money, Inflation, and the Budget Deficit
A simple rule of thumb, popularized by Rudiger Dornbusch, among others, lets
us calculate the rate of inflation for a country that, like Russia, has lost
the ability to borrow and must finance its budget deficit by printing money.
Such a country's rate of inflation will approximately equal the velocity of
the monetary base times the budget deficit expressed as a percentage of GDP.
(The rate of growth of real GDP should be subtracted from this result, but
the effect is small and will be ignored here.) The monetary base means
currency in circulation plus reserves of commercial banks. The velocity of
the monetary base (base velocity, for short) is the ratio of GDP to the
base. Note that this is different than money velocity, the parameter V in
the earlier equation, inasmuch as the monetary base excludes money in the
form of bank deposits. Base velocity has varied between 16 and 25 over the
past two years in Russia, and was near the low end of that range just before
the crisis.
Using the Dornbusch equation, we can ask what would happen if the tax and
expenditure policies of 1997 were to be continued for the coming year, but
with a full default on all debts and with the entire deficit covered by
printing money. (We choose 1997 rather than 1998 for the following
calculations because policies of the Chernomyrdin government in that year
represent something of a compromise between the harsher austerity of
Kiriyenko and the more expansionary policies advocated by many economists on
Primakov's team.) In 1997, the consolidated primary deficit of federal,
regional, and local governments was about 4 percent of GDP. (The term
"primary deficit" means the deficit excluding interest payments on the
government debt. The overall 1997 consolidated deficit was 8.4 percent of
GDP, but after a default, the primary deficit is all that is left.)
If we use the mid-1998 value of base velocity of 16, the equation would give
us projected inflation of 64 percent. However, it is more realistic to
assume that accelerating inflation will push base velocity back up toward
its 1995 level of 25, so a better guess would be inflation of 100 percent
per year.
One-hundred percent per year is not hyperinflation, but it is higher than is
desirable. Surveys of the experience of many countries suggest that there is
a "red line" of about 40 percent per year beyond which inflation seriously
damages an economy. Perhaps governmental adviser Leonid Abalkin had such
studies in mind when he recently named 40 percent as a suitable inflation
target for Russia.
However, for several reasons, even the 100 percent inflation estimate is
probably too optimistic. For one thing, the government is not currently
contemplating a full default on foreign debts, although no doubt some
rescheduling will be requested. Even if debt service were pared to
two-fifths of its 1997 level, that would mean another 2 percent of GDP to be
financed by emission. That would raise the projected deficit to 6 percent of
GDP and projected inflation to 150 percent.
What is more, because tax payments are not made instantaneously, inflation
tends to erode tax revenue. Economists call this the Olivera-Tanzi effect--,
named after two economists who observed the phenomenon in Latin America.
This effect arises because by the time taxpayers calculate the taxes owe on
their income from a given period and make the payment, the rubles the
government receives are worth less than when the income was earned. With
inflation running over 100 percent a year, and only a one-month lag in tax
collection, the Olivera-Tanzi effect could easily add another 3 percent of
GDP to the Russian budget deficit. The projected deficit is now up to 9
percent of GDP and the inflation forecast is 225 percent.
Next, we should remember that further inflation will lead to further
depreciation of the ruble, thereby increasing the cost, in rubles, of
servicing even part of the foreign debt. If we add another 3 percent to the
defict to allow for this effect, the inflation forecast rises to around 300
percent.
Is Russia Special?
Might we hope that there is something special about Russia, so that the
ordinary arithmetic does not apply? The Abalkin camp focuses on the fact
that much of Russian GDP is financed by barter and money substitutes like
veksels. They argue that if money were abundant enough, industry would
switch back to monetary payments, driving down the value of velocity and
making it possible to print more money without excessive inflation.
Because Abalkin's views are likely to have a strong impact on the new
government's policies, they are worth quoting directly. In his September 16
article in Nezavisimay Gazeta (see JRL 2381) Abalkin writes: "In these
circumstances the money supply (M) needs to be divided into two parts: real
money (M2) and all the forms of money
substitutes, from barter to overdue debts (MX). The money supply then takes
on the following aspect: M=M2+MX. In order to create a normal system of
payment-settlement relations, and to begin a real transition to the market,
all forms of quasi-money have to be
gradually forced out of circulation. This can only be done with the help of
emission."
The trouble with this scenario, however, is that the government can't force
people back into the monetary economy, especially not by printing money.
Firms and households won't return to the money economy unless rubles become
more attractive as a means of exchange and a store of value. That would
require low interest rates, low inflation, and a stable exchange rate. But
an expansionary monetary policy would mean just the opposite.
What we are dealing with here, and what Abalkin's formulation seems to miss,
is the well-known paradox that under inflationary conditions, a central bank
can control the nominal quantity of money in circulation, but not the real
quantity. (The nominal quantity of money means money measured in the
ordinary way, so many rubles or pesos or whatever. The real quantity of
money is the nominal quantity adjusted for inflation by dividing it by an
index of prices.)
The central bank can inject new nominal money into the economy, either
through the government's budget or through the banking system. In doing so
it momentarily increases the real quantity of money, measured at that day's
price level, beyond the level that firms and households are willing to hold.
They quickly set about ridding themselves of the excess nominal money either
by converting it to foreign currency or spending it on goods. These actions
don't decrease the nominal quantity of money, which simply moves from hand
to hand, but they do drive down the exchange rate and drive up prices, which
are the denominator used in calculating the real quantity of money. This
continues until the price level is high enough to return the real money
stock to its desired value. What is more, if the central bank continually
injects nominal money at a faster and faster rate, increasing rates of
inflation and depreciation cause velocity to increase so much that the real
money stock actually falls. This phenomenon has been a familiar part of all
hyperinflations ever since the German central bank, in 1923, purchased
special high-speed printing presses in a futile attempt to cope with a
perceived shortage of (real) money, even while the exploding supply of
(nominal) money drove inflation higher.
Parentheically, it should be noted that there are other, nonmonetary
barriers to remonetizing the Russian economy, for example, the use of barter
to avoid taxes or hide income diversion from shareholders. These factors
operate independently from the monetary dynamics discussed in the previous
paragraph. Barry Ikes provides a good discussion of some of the nonmonetary
factors in his contribution to JRL 2394.
Finally, it should be realized that the Russian economy is not in all
respects as demonetized as it is alleged to be, at least if we measure
things in terms of base velocity. After all, it is base velocity, not money
velocity, that counts for the relationship between monetary policy and
inflation.
In fact, Russia's mid-1998 base velocity of 16 is approximately the same as
base velocity in the United States! This surprising observation reflects the
fact that, although the US money stock (M2) is far larger in relation to GDP
than is the case in Russia, the US money multiplier for M2 is also much
larger. (The M2 money multiplier is the ratio of broadly-measured money to
the monetary base). True remonetization of the Russian economy would mean
restoration of confidence in the stability of banks and the exchange rate,
so that people could start using ruble bank deposits as a store of value and
medium of exchange, rather than ruble currency and foreign currency. That
would increase the Russian money multiplier at the same time that money
velocity fell. As a result, no great increase in the monetary base would be
required.
However, Russia is not now moving toward remonetization, but rather, toward
further demonetization. It has quite a way to go. For example, base velocity
in Brazil and Argentina, during their years of hyperinflation, rose to 100
or more. Going back to the Dornbusch formula, financing a 12 percent primary
deficit under conditions where base velocity is 100 gives inflation of 100
percent per month. That is true hyperinflation, and absolutely nothing in
Russia's economy today makes it impossible.
When it comes right down to it, the options facing the Primakov government
are not very attractive. When you look at the numbers, it is appears that
the government can avoid severe inflation in the coming year only if it does
at least one of the following disagreeable or difficult things:
(1) It could eliminate the primary budget deficit by cutting expenditures.
The Kiriyenko government managed to do that earlier this year, but for the
Primakov government to do so would mean fully abandoning the hope of a
"socially oriented market economy" with payment of wage and pension arrears,
indexation for the needy, and supportive subsidies for industry. That would
risk a quick collapse of the government's shaky political base.
(2) It could eliminate the primary budget deficit by raising taxes. Previous
governments have promised to do so, but they have failed despite strong-arm
methods. The Olivera-Tanzi effect, visible already in the August numbers,
will make tax collection even more difficult in the months ahead.
(3) It could opt for a full default on all principle and interest payments
on all foreign and domestic debt. For the foreign debt, doing so would turn
Russia in to an absolute financial pariah state. For the domestic debt, it
would mean an end to those friendly deals by which political insiders have
been enabled to redeem their defaulted GKOs. It would also mean a
politically unpalatable default on ruble sberbank deposits, which, for all
practical purposes, are just another form of government debt.
(4) It could find foreign lenders, official or private, willing to lend
Russia an amount equal to 5 to 10 percent of its GDP, that is, something
like 1.5 to 3 billion dollars per month for at least a year. It would be
sufficient, for example, to persuade the IMF and World Bank to meet their
mid-summer pledges in full, and at the same time, persuade foreign portfolio
investors to return to their early-1997 rates of acquisition of Russian
securities.
It's not a very appetizing menu, is it?
Contributed to JRL by Edwin G. Dolan, President
American Institute of Business and Economics
http://www.knight-hub.com/aibec/
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